Despite challenges, steel industry fares well in FY 19

The crude steel production at 107 MT rose by 3.3%. Total steel imports at 8.8 MT went up by 5% and steel exports at 8.5 MT dropped down by 26%, resulting in India becoming a net importer in FY19.

The crude steel production at 107 MT rose by 3.3%. Total steel imports at 8.8 MT went up by 5% and steel exports at 8.5 MT dropped down by 26%, resulting in India becoming a net importer in FY19.

We are happy to note that despite critical challenges faced by the Indian industry in FY19 in terms of demand, raw material prices and availability, price realisation, rise in imports and dwindling exports and lastly, the period in the aftermath of general election announcements that curbed fresh government policy measures, the steel industry has achieved notable performance indicators.

The crude steel production at 107 MT rose by 3.3%. Total steel imports at 8.8 MT went up by 5% and steel exports at 8.5 MT dropped down by 26%, resulting in India becoming a net importer in FY19.

One satisfying way of looking at this import growth is to perceive indigenous market absorption exceeding the domestic availability to need imports to fill up the gap. A look at the import data would surmise that a good component of flat imports (HRC, CRC, coated products, plates) as well as wire rods, TMT were well within the capability of the indigenous producers, but got imported on account of price-related factors or imported through trade channels to be marketed to domestic buyers at a premium.

Some part of these imports, namely seconds and defective grades electro galvanised steel, tin plate waste, tin free steel, pipes and bars and rods totalling approximately 0.4 million tonne valued at `1,473 crore have largely come via trade channel. The only difference is that these products would disband their seconds tag when sold in the market, charge lower than the corresponding prime variety even after charging a good premium over the imported price and so are capable to depress the ruling market price. The most vicious is the adverse impact on the quality of the end products made out of these.

It may so happen that some of these end products are also exported from India to other destinations till such time unsuspecting buyers are duly informed with the prospect of losing export orders permanently.Indian exports are primarily destined to Nepal, Italy, Vietnam, the UAE, Belgium, Indonesia, Malaysia, Spain and Sri Lanka, and they comprise around 69.5% of the total steel exports. Plates, HRC, CRC, galvanised and coated products, pipes, bars and rods, structural and semis form the primary basket of total steel exports.

Trade restrictions imposed by the US following the duty hike of 25% on all steel imports to the US under Section 232 of US Trade Act and a definitive safeguard duty imposed by the EU on all imports and converting these duties to quota based trade (around 70% of the average exports undertaken by a country in the last three years) have turned these major two high consumption points out of reach of Indian exporters. This has prompted them to look for neighbouring countries, south-east Asia, the UAE and Vietnam to accept Indian steel.

It is seen that while the BF/BOF route has taken a share of 47% in total crude steel production in the country, EAF process has taken 26% share and IF route the balance 27% share. The finished steel consumption in FY19 at 97.5 MT has grown by a healthy rate of 7.5% with rising demand from the construction and infrastructure sectors, automobile, engineering goods and consumer durables.

Under such a scenario, it is natural to have an outlook for steel in the current year. The ruling price of chinese export of SS 400 grade HRC stands at $ 530/t fob Tianjin. The corresponding domestic price in the US stands at $730/t ex works and in north Europe at $548/t ex works.

It is assessed that as China alone remains the driver of the road map that global steel industry is likely to follow, the fluctuations in the Chinese domestic market would determine the course of other markets. The current remunerative price regime is to last till H1 of Fy20. During this period, there is a distinct possibility of a rise in iron ore price from the current level of $92/t cfr China on account of a drop in production from vale and also a rise in pellet price due to a similar reason.

The stimulus measures (4 trillion RMB) in China has led to rising FAI in boosting steel consumption (92% of consumption accounted for by FAI in China). It is unlikely that China would suddenly switch from the FAI-led economy to consumption led economy in H2 of the current year, although it is believed to be so by some analysts which include WSD.

The reduction of VAT from 16% to 13% and 9% VAT credit on export of HRC with Boron may provide a boost to HRC exports from 78 wide strip mills in China. A large part of the global steel market would, however, depend on what shape the US-China trade war takes.

Apart from a general 25% duty on steel, the US has imposed 10% duty on $200 billion Chinese manufacturing exports to the US and the duty would rise to 25% in the event of no trade pact with China.